IDFC Ltd can exit as promoter of IDFC First Bank, RBI clarifies

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The Reserve Bank of India has clarified that IDFC Limited can exit as the promoter of IDFC First Bank Limited, the bank said in a statement to exchanges on Wednesday. This could pave the way for a potential reverse merger between IDFC Limited and IDFC First Bank Limited, according to two directly people in the know.

The Reserve Bank of India has clarified that IDFC Limited can exit as the promoter of IDFC First Bank Limited, the bank said in a statement to exchanges on Wednesday. This could pave the way for a potential reverse merger between IDFC Limited and IDFC First Bank Limited, according to two directly people in the know.
“We would like to inform you that the Reserve Bank of India (“RBI”) has, vide its letter dated July 20, 2021, clarified that after the expiry of lock‐in period of 5 years, IDFC Limited can exit as the promoter of IDFC FIRST Bank Limited,” IDFC First Bank said in an exchange notification. This five-year lock-in period ended on September 30th, 2020.
“The RBI clarification is along the lines of what was already allowed for small finance banks like Equitas and Ujjivan who were allowed to amalgamate the promoter entities with the respective SFBs. So it was expected to happen for IDFC as well. The board will now consider a reverse merger between IDFC and the bank and to collapse the holding company structure, after a few things fall into place,” said a person directly involved in the matter on the condition of anonymity.
This person added that an official application would have to be submitted to RBI for its explicit nod for a reverse merger between the two entities. Besides, IDFC may also have to sell its mutual fund business, IDFC AMC.
“If you see the interpretation of RBI rules, a holdco is needed when there are other non-banking financial businesses in a company. Even the internal working group (IWG) recommendations on private banks say that banks currently under NOFHC structure can be allowed to exit from this structure if they don’t have other entities in their fold.. So the natural assumption is we will have to sell the AMC business to collapse the holdco structure,” said another official at the bank who did not wish to be quoted. The process may take a while, both people quoted earlier clarified.
RBI granted IDFC a banking licence in April of 2014 pursuant to the February 2013 universal bank licensing guidelines. These guidelines mandated IDFC create a non-operative financial holding company (NOFHC) structure to house the bank and other financial services units of the parent company to ensure the banking business was completely ring-fenced from other activities of the firm. The parent company IDFC was also mandated to hold a minimum of 40 percent stake in the ban, locked in for the first five years, and thereafter reduce it to 15 percent over ten years. The RBI’s latest IWG recommendations propose that the cap on promoters’ stake, in the long run, may be raised from 15 percent to 26 percent of the paid-up voting equity share capital of private banks.
The IWG recommendations, if and when finalised, will play a critical role in how banks like IDFC exit the holdco structure, and whether other banks with multiple financial services businesses in their fold would have to create one, one of the people quoted earlier added.
While such a reverse merger could take a while to fructify, shareholders of IDFC Limited stand to benefit if it does go through. A merger could help unlock shareholder value, remove the holding company discount for IDFC Limited shareholders, according to analysts.

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Cipla889.90 -23.20 -2.54
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